Potholes Ahead: Grim Prospects For Thai Economy In 2012

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Potholes ahead: Grim prospects for Thai economy in 2012

Piyasak Manason

Special to the Nation

Economist Nouriel Roubini did not earn his credentials as "Dr Doom" easily.

Back in 2005-6, while the average American saw the price of his house double or triple in value, the modern-day economic Cassandra warned that "the United States was likely to face a once-in-a-lifetime housing bust, sharply declining consumer confidence, and, ultimately, a deep recession". The prediction seemed peculiar in those days, but in retrospective, current reality is not so far from Roubini's forecast.

Of course, he and the few others who foresaw the great recession did not resort to crystal balls to conjure up their apocalyptic scenarios. They were the result of careful analysis of distorted market logic. In the case of American real estate, the increase in real home prices at the beginning of the 21st century that came in tandem with an increase in newly-built houses was the distorted logic; it implied that the housing bubble was forming and waiting to burst.

Applying that analysis to Thailand's economic forecast for 2012, and it is not unreasonable to believe that prospects are dimmer than many economists expect. In contrast to the consensus, we at Kiatnakin Intelligence expect the worse is yet to come. From its current level, Thailand's GDP will contract sharply for at least two consecutive quarters. The rebound in later quarters, although quite substantial, will not be enough to pull us out of a period of stagnation. As a result, Thailand' economy will grow at between around 1.0 per cent and 2.8 per cent in 2011-12. This is due mainly to two factors.

The first is the structural damage to Thailand's economic fundamentals wrought by this year's flood. Unlike other forecasters, we believe that the flood's effect on the economy will be long-lasting. Public as well as private infrastructure needs to be repaired or reconstructed. And during that reconstruction period, production will not return to full-capacity, which will lead to contraction mainly in the production side of the economy, such as the manufacturing and transport sectors.

The second factor behind our forecast is the dim outlook for the global economy, due mainly to the intensifying European debt crisis. We expect that European and IMF inefficiency in coming up with a deal to restore investors' confidence will make matters worse. Yields of peripheral European countries' bonds will rise continuously unless Europe's central bank acts as a lender of last resort while core EU countries give their full support to their debt-ridden peers. Since that prospect will not be easily arrived at in the near future, confidence will erode and volatility in financial markets will be the norm. Subsequently, the real sector will be hit by a slowdown in consumption and investment in the West, which will lead to a slowdown in exports from Asia, including Thailand. We project that, hurt by these two factors, Thailand's exports, and hence the economy, will contract for at least two consecutive quarters.

Like every bear, we also have reasons to be gloomy - four in all. The first reason is the behaviour of the Thai economy after every past crisis. In the last 16 years, Thailand has faced five recessions: the Bangkok Flood in 1995, Asian Crisis in 1997-98, US dot-com bubble in 2001, tsunami in 2004-05, and global financial crisis in 2008-09. Not a single recession saw the Thai economy fully recover within one quarter after contraction; it took at least two quarters for the economy to bounce back to its prior level. Hence, it is likely that the impact of the 2011 flood crisis will last longer than consensus expects.

The second reason for gloom is the effect of eroding confidence on the economy. Normally the mainstream economist ignores this factor due to its lack of theoretical background. However, in the last seven years, business and consumer confidence have been worn down following major shocks, be they tsunami, coup or political protests. As a result, domestic demand, especially private investment, would subsequently decline, as entrepreneurs entered a "wait-and-see" mode. From our estimate, a 10-per-cent drop in the consumer confidence index results in 10-20 percentage point drop in investment. There is no reason to expect that this time is different.

The third reason is that, in a "crisis" period, both private and public research houses are normally too optimistic with their projections. This due to the fact that these research houses typically have an overconfident view of recovery and put too much faith in authorities' economic measures. Hence during the crisis year, projections will tend to err on the upside. For example, at the beginning of 2005, right after the tsunami, the two main economic agencies and one major Thai private research house projected that GDP would grow by around 5.5-6.1 per cent. It actually grew around 4.6 per cent. The same mistake was repeated during the global financial crisis in 2009, when the trio projected that GDP would grow by around 1.0-3.0 per cent, while the actual figure was a contraction of -2.3 per cent. Hence, it is possible that the 2012 consensus projection of around 4-5 per cent is higher than the real figure.

The last reason is the counter-balancing measures used by the powers that be, which typically seem to be "too-little-too-late". This is partly due to an over-optimistic view. If the authority believes the economy will recover sooner rather than later, they will likely react minimally. For the central bank, that leads to "behind-the-curve" behaviour. For example, during the last two cycles of policy rate cuts, in 2006 and 2008, the Bank of Thailand tended to make cuts one quarter later than it should. This was not entirely their fault, since the economic assessment normally comes after the period is over. Hence, their response to economic figures is unavoidably laggard. It would take a visionary central banker to stay ahead of the curve in responding to a crisis.

In the case of fiscal policy, recent experience suggests that announcements of grand/mega projects do not translate to real outcomes. This is down to the slow disbursement of government budgets. As a result, government investment is unlikely to be a strong engine for economic growth, as evident by the contraction in real public investment for six consecutive quarters from the second quarter of 2010 until now. It remains to be seen, however, whether the latest grand infrastructure project to prevent future flooding will proceed as planned or not.

All in all, although the true impact of 2011's great flood and the euro debt debacle remain to be seen, it is highly likely that the road to recovery won't be smooth. Life will be harsh next year. Entrepreneur, investor, and citizen of Thailand; be prepared.

Piyasak Manason is vice president for research and planning at Kiatnakin Bank. He can be reached at Piyasak.man [at ] kiatnakin.co.th.

-- The Nation 2011-12-16

[abcz9]

i think a crash will come. the price of land outside sakon nakhon is 6 mil. a rai.

[notime]

There are "grim prospects" for every economy in 2012. So, what's the news? That maybe Thailand is on the same planet as some alien Farang had been noticed to mumble?

[rakman]

Fed Ex delayed delivery of 11 Boeing 777 cargo planes citing the softening Asian market.

While the US unemployment rate has dropped, the calculation is based on (the number of people collecting unemployment) divided by (the number of working people). Many people are falling off the unemployment rolls due to benefit expiring or just quitting looking for work, or exiting University or High School and not finding work. These people aren't counted.

The number of people working in the US is at a historic low, the economy is not adding enough jobs (if in normal times) to keep pace with the number of new people who would enter the work force. Therefore the "actual" unemployment figure is at least double.

On the bright side, people with Bachelor degrees and higher, or skilled, have very low unemployment, while non-degree holders, high school dropouts and unskilled labor are around 25% unemployed.

Once some stability of policies can be established for more than a year or two, then the economy will pick up faster.

[newermonkey]

This is all true, but does it matter? as the end of the world event is happening in 2012 aint it

[apetley]

This is all true, but does it matter? as the end of the world event is happening in 2012 aint it

Wifeys dad went to the local fortune telling monk this week and was told he had another 10 years to live so I guess predictions for worlds end next year are a little off.

[newermonkey]

This is all true, but does it matter? as the end of the world event is happening in 2012 aint it

Wifeys dad went to the local fortune telling monk this week and was told he had another 10 years to live so I guess predictions for worlds end next year are a little off.

I guess the monk does not watch the discovery channel much then?

[mommysboy]

It's a very good piece of analysis.

Thailand prizes its Foreign reserves, and low Government debt, above a real driver like inward investment in infrastructure. It does this because there has always been growing demand for its exports and enough idiot farangs to plough in capital investment. The big flood has challenged the Thai Government to step forward and invest money like every other nation or lose big time, and I've no doubt they'll bluster, talk big numbers, and do very little very late.

[Felt 35]

It's a very good piece of analysis.

Thailand prizes its Foreign reserves, and low Government debt, above a real driver like inward investment in infrastructure. It does this because there has always been growing demand for its exports and enough idiot farangs to plough in capital investment. The big flood has challenged the Thai Government to step forward and invest money like every other nation or lose big time, and I've no doubt they'll bluster, talk big numbers, and do very little very late.

So where is the numbers i.e. state debt in relation to the country`s gross domestic product?

[mccw]

Some interesting numbers:

http://www.gfmag.com/gdp-data-country-reports/163-thailand-gdp-country-report.html#axzz1ghGMddxK

[Felt 35]

Some interesting numbers:

http://www.gfmag.com/gdp-data-country-reports/163-thailand-gdp-country-report.html#axzz1ghGMddxK

Yes the Thai base economy seems pretty healthy regarding the factors below:

Gross Domestic Product (GDP) = 332.47 Billion and General government gross debt as % GDP = 43, 7%

The Government bond ratings are however in a grey zone.

Btw, thanks for the very informative statistic.

[w11guy]

There are "grim prospects" for every economy in 2012. So, what's the news? That maybe Thailand is on the same planet as some alien Farang had been noticed to mumble?

Not every country has grim prospects. Many are doing quite well. Even the Eurozone is forecast to grow next, year, so not grim at all. Just newspapers and others using frightening headlines and stories.

[TAWP]

Fed Ex delayed delivery of 11 Boeing 777 cargo planes citing the softening Asian market.

While the US unemployment rate has dropped, the calculation is based on (the number of people collecting unemployment) divided by (the number of working people). Many people are falling off the unemployment rolls due to benefit expiring or just quitting looking for work, or exiting University or High School and not finding work. These people aren't counted.

The number of people working in the US is at a historic low, the economy is not adding enough jobs (if in normal times) to keep pace with the number of new people who would enter the work force. Therefore the "actual" unemployment figure is at least double.

On the bright side, people with Bachelor degrees and higher, or skilled, have very low unemployment, while non-degree holders, high school dropouts and unskilled labor are around 25% unemployed.

Once some stability of policies can be established for more than a year or two, then the economy will pick up faster.

And the minimum salary levels in most states and the unions in some industries are making sure the number of unemployed isn't going to go down at any high rate 'over there'.

[mca]

Economist Nouriel Roubini did not earn his credentials as "Dr Doom" easily.

Too right when you're up against the Fantastic Four.